*Updated for 2020
If you’re self-employed, incorporating your business can seem like a daunting task full of hoops to jump through and endless paperwork to file. And all for what? Your business is running totally fine without being incorporated, so you might be wondering, “Why should I incorporate?” Well, as Vancouver financial advisors, it’s our job to make sure you get the most out of your money and your business. In reality, there are many benefits of incorporating your business — from tax savings to reduced liability to small business deductions — and we’re here to show you how.
Prometheus Private Advisory Group is breaking down the benefits of incorporating a business in Canada. Here, you’ll learn:
- What it means to incorporate
- Why you should consider incorporating your business
- How incorporation can save you money in the long run
Ready? Read on!
What is Incorporation?
Incorporation is a form of business ownership that creates a distinct legal entity that is separate from its owners (known as shareholders). Unlike sole proprietorships or partnerships where the owners are 100% liable for any debts, incorporated businesses offer shareholders limited liability, insulating them from being held responsible for debts.
At Prometheus Private Advisory Group, we work with many medical professionals in the Vancouver area. If that’s you, it’s important to note that limited liability does not apply to medical liability, so incorporated medical professionals can still be held personally responsible for any malpractice.
Should You Incorporate Your Business?
Choosing to incorporate your business is a big decision that should be based on a number of factors. First of all, if you’re just starting out and still building up your revenue, it may not be worth it to incorporate. While corporate tax rates are lower than personal tax rates, your business needs to be earning enough money to reap the benefits.
In other words, it only really makes sense to incorporate if your business makes more money than you need to live comfortably. For example, if your business earns $75,000 a year and you only need $50,000 of that, you’ll receive a significant tax break on the $25,000 that remains in the business.
Taxes aren’t the only thing to consider when deciding whether to incorporate. You’ll also need to be prepared for the increase in responsibility that incorporation brings, including more paperwork, double the tax returns, and registration costs. We’re not trying to dissuade you from incorporating your business at all — we just want you to have all the facts so you can make the best decision! On that note, let’s dive into the reasons to incorporate your business in Canada.
Benefits of Incorporating a Business in Canada
1. You Get a Better Tax Rate
Tax savings is one of the main reasons businesses incorporate, especially for medical professionals. We’ve covered this a little bit already, but tax rates for corporations in Canada are significantly lower than personal tax rates, so it can save you big money if you incorporate. That is, as long as your business is making enough of a profit (revenue minus costs). Like we described earlier, any surplus money that’s left in the business is charged at a lower tax rate than your personal income tax, that money then becomes your “retained earnings” and sits comfortably in your corporate account. Take for example, in BC, the small business tax rate (net income below $500,000) is just 11%
Be aware, though, that if you decide to eventually pull those funds out of the business account and into your personal pocket, you will be charged at the personal rate, since you are effectively paying yourself. But if you simply use it towards business-related purchases, you’re in the clear.
2. You May Qualify for Small Business Deductions
Incorporating your business means you may be eligible for the federal small business deduction (SBD). This tax benefit for small businesses reduces the income tax your corporation would otherwise have to pay, dropping your small business tax rate down from 27% to just 11% if you’re in British Columbia! (Note: Each province has their own business tax rate which is added on to the federal business tax rate). To qualify, your business must be a Canadian-Controlled Private Corporation (CCPC) and earn a maximum of $500,000 annually.
3. You Benefit from Limited Liability
This is one of the biggest benefits of incorporating your business (but remember, this doesn’t extend to medical liability). As a sole proprietor or partnership, you as the business owner assume total liability. This means your house, car and all other personal assets can be seized to cover any debts your business incurs. When you incorporate, however, you become a shareholder in your business and a shareholder’s liability is limited to the percentage of the company you own. Shareholders cannot be held responsible for losses and debts, so incorporating provides you with a safeguard.
4. Corporations Have Staying Power
As a sole proprietorship, if you decide to leave your business, it basically ends with you. A corporation, on the other hand, lives on … well, forever (or until someone decides to dissolve it). This makes it much easier to sell your business because you’re selling an independent entity together with its assets and liabilities, and most importantly, you will be rewarded for your life’s hard work in building up this business. If you sell an unincorporated business, you are personally selling the property and assets associated with that business, which can be a much more complicated process.
5. Increased Credibility, Increased Access to Capital
Just like having MD or PhD after your name gives you credibility and an air of sophistication, so do Inc., Ltd. and Corp. Studies show that incorporated businesses with fancy letters after their names are perceived as more stable than unincorporated businesses. This means that incorporating could earn you more business — from customers and investors alike. Likewise, incorporated businesses have more access to capital because banks and investors are more likely to get involved with incorporated businesses.
So there you have it. Are you thinking about incorporating your business? Still have questions about the process of incorporating in Canada or if incorporation is right for you? Call Prometheus Private Advisory Group to talk to a financial advisor in Vancouver today.